Economic Spillovers and Political Values in Government Competition for Firms

Donghyuk Kim

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: This paper examines how economic spillovers and political values affect strategies and welfare of governments bidding for firms. Government competition and firm location choice are modeled as a variant of a first-price scoring auction in which governments compete for firms that have unobserved geographic preferences. Within-metro economic spillovers generate freeriding motives, implying that metro-level coordination can improve joint expected welfare of individual governments. However, presence of political values can steer governments away from coordination such as ceasefire on incentive provision. Reduced-form evidence suggests that political values increase with the intensity of within-metro competition and that governments freeride when economic values spill over. Measures of economic spillovers are informative of the size of political values; back-of-the-envelope calculations suggest that total political values for 112 firms that relocated within Kansas City amount to over $89 million.

Date: 2020-09-28
New Economics Papers: this item is included in nep-cse and nep-ure
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